Implementing a digital strategy in the financial services industry

Digital strategy professor Steve Muylle recently stated that “technology firms are increasingly trying to disrupt incumbent companies that operate in industries rich in tradition.” But how does he see that happening in the financial sector?

“First of all, in the FinTech space, we see start-ups that develop a technology and look for interesting sweet spots where they can potentially make money. These start-ups typically position themselves as being more open, more transparent and more fair than the financial institutions. Their value proposition is possibly about saving money: they do not charge as many commissions as financial institutions. So, if customers decide to go with these start-ups, they go for a transparent, open, fair player that is charging lower prices. One example is TransferWise, where you can easily transfer money globally, with no hidden fees.

Yes, financial institutions have a long tradition, but they’ve also been generating a lot of income throughout that tradition. Some of that is relatively easy money − and that part is very appealing to technology players. It’s especially easy to go after interactions between customers and financial institutions, as long as a banking license is not necessary. And it’s hard for banks to respond to that.

Nevertheless, from the moment a banking license is needed, it becomes a completely different ballgame. Another form of new entrants are the ones that do obtain banking licenses. In the Netherlands, Bunq bank started with a social payment model whereby friends can pay each other. Although this kind of activity does not require a banking license, Bunq obtained one, which enables them to go beyond interactions between customers and financial institutions to leverage their technology capabilities in regulated banking activities as well.

Incumbents have a rich tradition: they’ve had solid businesses, with nice financial returns, and this tradition is rapidly being challenged. In an interview with the founder of Bunq, the first thing that he says is: ‘we are not a bank’. These start-ups typically do not want to be a bank − it’s not fashionable to be a bank. Instead, they position themselves as technology firms helping people with financial services. It’s ironic because Bunq is a bank, they have a banking license. But when they go outside, they say they’re not a bank. What they mean is that, instead of providing traditional banking solutions, they offer technology solutions to address specific customer needs that involve financial services.

In Germany, there is Friendsurance. This start-up focuses on small insurance claims, moving them from big insurance companies to the customer’s social network: the customer lines up a community in which the participants insure each other. The big advantage is a 40% saving on the premium versus a traditional insurance company, and staying away from regulation.

Friendsurance is successful and attracts a lot of buzz. Why didn’t an insurance firm come up with that model? One reason is that incumbents are usually not as innovative as these start-ups. They do not have the same culture nor the same interest in doing this: why would they cannibalise their own business? As the thinking goes, it may be better to shoot yourself in the foot instead of being shot in the head.

How should existing banks and insurance companies look at these tech firms? Threats? Competitors? Potential partners?

“In my opinion, they represent an opportunity more than a threat. In terms of numbers, tech firms represent a small fraction of the banks’ and insurance companies’ business. There is growth potential, but at this point it’s not massive. Although the amounts of venture capital being invested in these firms show that they are promising. For now, they’re not wiping out banks or insurance firms − they’re more like a wake-up call, an eye-opener. Banks obviously have assets, skills, competencies, and expertise. If a bank creates a FinTech start-up, it still has the parent company behind it, which tech firms typically do not have (other than their high-profile investors). If banks stick their heads in the sand, they will be harmed − so, they should heed the wake-up call and get going.

One option is to team up with these tech firms. An example is peer-to-peer lending clubs collaborating with banks. The banking ecosystem is changing, and the number of players is increasing − some of them are promising, and banks are exploring opportunities to partner with them.

Another option is to create ventures through spin-offs. Yet these ventures could benefit from the parent institution’s resource and capability base. Where can they borrow from what is available, and where do they let go and move in a completely new direction? But it’s not a binary choice.

Ecosystems are important in the technology shift. How should banks view these platforms?

“The hot strategic issue today is platform and ecosystem businesses in lots of industries. It’s all about building platforms and becoming the platform leader. And it’s crucial to identify which role you want to play in these ecosystems. Preferably, you want to sit on top of the food chain, which requires you to re-invent yourself as a platform business. It’s not just about the customer and me − it’s also about a whole set of stakeholders surrounding that. That’s true customer centricity.

The traditional financial institution view of customer centricity is to put the customer in the middle, surrounded by all of the different channels: branches, website, apps, social media, call centre, ATMs. But real customer centricity is when the customer is in the middle, and banks, credit card companies, telecom operators, new entrants, operating systems makers, and others surround the customer… You can come up with a whole map of these players, in which all of them impact the customer. Suddenly, the entire relationship with the customer is disintermediated by a platform − and that’s what you have to watch out for.

My opinion is that this is really the way of the future. Now who’s going to control these platforms? Will it be Google? Traditional banks? FinTech players? And it won’t be just one platform but multiple ones: how do you sit on top of these platforms, and how do you manage the connections between platforms? Plus, the platform business is also about data. Who owns the data? What do they do with it?

The biggest threat for banks might be regulation on customer privacy. Start-up companies are looked at in a different way, and so regulation doesn’t affect them as much − which puts banks at a disadvantage.”

Do you share the view that, at some point, FinTechs will always need to team up with financial institutions to achieve economies of scale?

“In theory, firms like Google will not need to team up with a financial institution to reach scale. That’s more of a business decision: do I want to re-invent the wheel? Banks have these massive reliable back-office processing engines that are needed at some point. A start-up does not necessarily need to replicate all of these things. Why does Apple offer payment solutions? I don’t think it’s because they want to become a bank − they simply want to make the customer’s life easier, make some money in the process, and potentially leverage data. Even if we suppose that they would want to become a bank, why would they team up with an existing one?

On the other hand, we observe that half of all peer-to-peer loans are acquired by banks. Without the banks, the P2P loan providers could not have reached the scale that they have − nor would they have grown as fast as they have. For banks, it’s an easy mechanism: they look at their loan portfolio and select the types of loans for which they will team up with a peer-to-peer lender. But again, this is not a black-and-white binary choice.”

Another possible option for financial institutions is to start behaving like entrepreneurial start-ups and boost innovation. Would you recommend employing that kind of strategy?

“Yes, the organisation of banks needs to change − you need to become an outside-in firm, where you bring the outside back into your organisation. If you have an ICT department with very mature professionals who are not used to a start-up environment, it is definitely not a bad idea to make them aware of what is happening out there. That’s where external innovation comes in: putting your staff into incubators and accelerators, letting them experience this way of working for a while, then taking them back and deploying specific mechanisms and incentive schemes to have them apply that way of working in the bank or the insurance company. That’s one way. Although it can be extremely tough in terms of change management, because it’s about changing the culture of the company.

Another way to look at this is to launch your own separate ventures and either let them go their way, or search for how they can benefit from your original business. In the literature, this is called the Transformation A & Transformation B approach:

You transform your core business based on digital technologies and try to bring in a new culture – Transformation A

And then you create a new business that will make your traditional business obsolete − Transformation B

With Transformation B, the separate venture on its own is not any better than a start-up − but once backed up by the parent company, it can be much stronger.

The ‘Hello bank!’ case is a very good example of that kind of strategy. While Transformation A is going on at the BNP Paribas Group, they launch Transformation B with ‘Hello bank!’ − and now they’re looking at how it can change the current business. They have a big advantage over start-ups, because ‘Hello bank!’ has access to the parent bank’s expertise, processes, resources and knowledge. For the BNP Paribas Group, ‘Hello bank!’ is a real laboratory where they have the freedom to experiment and to bring what works back into the larger structure − while that structure also backs up the transformative venture. That’s a very interesting combination.”

You’ve launched a digital strategy programme. Can you tell us a bit more about it?

“The digital strategy programme is a 3-day programme that has been very successful so far. It takes an established organisation with a digital strategy as a starting point and looks at how to bring it to the next level. We study what is happening in the market. What are the market shifts? Which new business models are emerging? How are ecosystems being redefined? What are the technology developments? How are analytics, artificial intelligence, cloud computing, mobile, social, video, virtual reality, Web, etc. developing?

Then we explore how firms can adapt their existing strategy to all these changes. Digital strategy is organisational − it needs to happen at the top of the organisation. We look at the context: what are your strategic priorities? What is your current business model? Then we study what digitisation can bring to current organisations, what needs to be changed. We do that by means of a generic set of processes, as summarised in this box:

The E-Business Planning Process − building blocksA planning process that puts e-business into perspective and helps make it manageable

Step 1: Identify potential e-business initiatives

Adding value through e-business

Cost efficiencies through e-business

Step 2: Analyse the functional scope of e-business initiatives

Network services

Trade processes

Decision support processes

Integration processes

Step 3: Analyse the sustainability of benefits from e-business initiatives

We analyse how different technology types can be embedded into current businesses, or how new ventures could be created. We map the ‘as is’ situation and look at the ‘to be’ situation. It’s a digital strategy programme, so it’s about strategy: how do I get from the ‘as is’ to the ‘to be’? We deal with different technologies: web, social, mobile, … We also work on the return on investment: how do I build models to measure ROI? Finally, we use cases, including the ‘Hello bank!’ case.

Another programme is the Global Digital Strategy Consortium, dedicated to the financial services industry. The first edition took place in December 2015 in Dublin, where we checked out the FinTech scene for one day and worked two days on digital strategy for financial services exclusively. The next edition will take place on 8-10 June 2016 in Brussels."

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